Tuesday, October 19, 2010

What if Obama losses control in mid term election?

(Click on the image to see details)

Market research firm Birinyi Associates went back to 1945 to take a look at how the market reacted to different mid-term elections. What the market research firm found was that, yes, stocks do tend to rise in the months just before and right after midterm elections. But, surprise, surprise, what actually happens in the elections, not just the fact that they are held, does make a difference.

In general, Birinyi found that going back to 1962 stocks jumped nearly 10% in the two months before and three months after midterm elections. But in elections when there was a change in the majority in either the House or the Senate, the market did considerably worse. In the six midterms going back to 1945 where there was a switch in the party in power in Congress stocks rose just 6% in the five months around the election. What's more, when the majority switched from Democrats to Republicans, the stock market did even worse. Take a look at the chart at the top of the post. When the donkeys became elephants, stocks tended to fall. The market lost 6% when Republicans took power during Truman's presidency, and 4% when Republicans took over the majority in 2002. The Gringrich-lead 1994 Republican take-over of Washington produced a lackluster 3% stock market return.

So will this happen again? I think it might. A lot of strategists have been explaining past positive midterm results and why Republicans are a good thing for the market by saying that gridlock is good. Markets and companies perform best when Washington gets out of the way. And a do-nothing-Washington might be the best when the economy is good. But at a time when we have lackluster economic growth, and a ballooning budget deficit to deal with, we need all the help we can get, even if that help comes from Washington.

Read more: http://curiouscapitalist.blogs.time.com/2010/09/20/could-a-republican-sweep-hurt-stocks/#ixzz12nMLJw5R

My comment
I generally do not like to predict market direction based on stuff like this. But I know it will have some impacts on the market because they hate uncertainty, especially whenever there is a major change of control.

If you look at the chart, 2002 was the only year that market losses since 1945. Why? The market fears that Democrat is blocking whatever market friendly programs by Bush.

Coming to this time round, there are two ways of looking at it. If Republican wins, the market may perceive that they can stop some of Obama ambitious and crazy programs, that may boost the market confidence further. Quite a number of people really dislike Obama now.

However, if the economy is truly weak and intervention is necessary and Democrat is losing influence, recovery will be a lot weaker. Hence a weaker stock market later. Me? I will be taking a break from the market until the first week of November if you know what I mean -- sitting on the fence. Historical data has no meaning to me now.

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